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July 24, 2008
Digg This!

For all you search engine savvy, Wall Street minded professionals out there, here’s something to chew on. Reports of a $200M Google bid for the user-driven, content evaluation website Digg.com have surfaced this week, and the financial & legal implications are wide ranging. As of now, Digg is inked into a 3 year contract with Microsoft that has generated approx. $11.3M in venture capital for the site using Microsoft’s ads. In addition, Microsoft has been part of the negotiations for Digg too. However, their supposed bids are more in the $100M range. Even in that range, investors do not think this is a good move for the shareholders of either company. This is extremely relevant given MSFT shares are down 33% from their 52 week high, while GOOG‘s are down a whopping 44.2% from their 52 week high.

According to Google’s own Ad Planner system, Digg gets 6.5M unique visitors per month. Using very basic math, assuming Google could run ads on Digg at a CPM (cost per thousand impressions) of $4 per page, the $200M bid values the company at 60 times revenue! Tweaking the CPM cost will alter Digg’s valuation, but even at $12 with a 100% growth rate in its first year post-acquisition, we’re talking 10 times earnings (which is still high for you non-investors out there).

Which brings us to Google’s intent. Their financial consultants have obviously crunched tons of numbers and most likely have multiple value variations based on growth rates, CPMs and other factors. However, much like Facebook (Microsoft partnership), Digg’s financial value has not been proven yet. In addition, Google does not need Digg’s algorithm to create a user-based voting evaluation system; they could build their own. So, one must wonder: is this an attempt to further Digg Microsoft’s search engine marketing grave? Given the numbers, Wall Street analysts think so, and Microsoft might not put up with it given Google’s recent bullying (think sponsored link ads on Yahoo). Should Google move forward, a legal showdown is not out of the question.

Comments

This is becoming quite the soap opera. Microsoft is like the former model who is just not getting the respect they used to. The fresh faced Google just so happens to be the bees knees, saying all the right things. I wonder when the forgotten step child will come into play, or who it will be…

You’ve got to think that Google has, at the very least, some inkling of an idea of how to monetize YouTube if they’re going to be willing to spend so much on Digg. I mean, in all seriousness, despite YouTube’s amazing breadth on the Internet, it’s not exactly a cash machine. Digg presents similar problems. If Google is willing to take the plunge with Digg, then I would be very curious to see if there is some spectacular, secret business plan down the road for YouTube.